Danka Reports Q2: Revenue Slides 6%, Net Loss of $17.3 million

Wednesday, November 05, 2003

Press release from the issuing company

ST. PETERSBURG, Fla.--Nov. 4, 2003--Danka Business Systems PLC today announced results for the three and six month periods ended September 30, 2003. The company will hold a conference call today at 11:00 a.m. EDT to discuss these results.
Second Quarter Results
Total revenues were $323.0 million in the second quarter of fiscal year 2004, a decline of $20.8 million or 6.0% from the $343.8 million posted in the year-ago quarter. The decline in total revenues during the quarter was partially offset by a $17.5 million foreign currency benefit. Retail equipment and related revenues were $115.2 million in the second quarter, a 2.4% decrease from the year-ago quarter. This decrease was primarily due to decreased revenues in the U.S. segment offset, in part, by increases in the European and International segments. Excluding a foreign currency benefit of $4.4 million, the European retail equipment and related revenues were up 2.6% from the year-ago quarter. Retail service revenues were down 10.1% from the year-ago quarter to $155.3 million. This decline was offset, in part, by a $7.4 million foreign currency benefit. Retail supplies and rentals revenues were $30.3 million during the second quarter, a 12.0% decrease from the year-ago quarter, primarily due to the past downsizing of the capital intensive U.S. and European rental business offset, in part, by a foreign currency benefit of $1.4 million. Wholesale revenues were $22.1 million during the second quarter, a 19.4% increase from the year-ago quarter due, in part, to a $2.7 million foreign currency benefit.
Total gross margins increased to 37.2% in the second quarter from 36.0% in the year-ago quarter. Total United States gross margins increased to 41.9% from 40.9% in the year-ago quarter while European gross margins increased to 32.4% from 32.2% and International gross margins increased to 34.0% from 21.4% in the year-ago quarter. The International and total gross profit percentage for the year-ago period was adversely affected by a $3.4 million charge that consisted primarily of inventory and residual write-downs in Canada. Absent that charge, International's total gross profit margin in the year-ago quarter would have been 32.7%.
The retail equipment and related sales margin increased to 36.1% in the second quarter from 32.6% in the year-ago quarter primarily due to a shift in the mix of our sales toward higher margin equipment sales and the non-recurrence of a $1.9 million write-down of retail equipment inventory in our International division in the year-ago quarter. The second quarter retail equipment and related sales revenue gross margin was achieved in spite of a $3.3 million decrease in lease and residual payments from a diminishing external lease funding program which contributed $3.7 million to gross margins in the year-ago quarter. Gross margins for retail service increased to 40.8% from 39.1% primarily due favorability in the European and International divisions and due to the non-recurrence of a $0.9 million write-down of parts and supply inventory in our International division in the year-ago quarter. Gross margins for supplies and rentals decreased to 37.4% from 40.5% in the year ago-quarter. The European wholesale gross margins decreased to 18.1% from 20.6%.
Overall, SG&A expenses in the second quarter increased by $0.9 million or 0.8% to $119.1 million from $118.2 million in the year-ago quarter. This increase was created by a foreign currency movement of $4.8 million. Excluding foreign currency changes, SG&A expense for the second quarter would have declined by $3.9 million from the year-ago quarter. During the quarter, the company incurred $2.1 million in Vision 21 and ancillary expenses. As a percentage of revenue, SG&A costs increased to 36.9% from 34.4%. Total capital expenditures in the quarter were $16.3 million and were largely related to the company's Vision 21/Oracle implementation and the consolidation of the corporate headquarters.
Danka reported operating earnings of $1.0 million in the second quarter of fiscal year 2004 compared to operating earnings of $9.3 million in the comparable year-ago quarter. The company's net loss for the second quarter was $17.3 million, compared to net earnings of $1.8 million in the year-ago quarter. The net loss includes the negative impact of the $20.6 million pre-tax write-off of debt issuance costs related to the company's former credit facility, which is equivalent to $.21 per diluted American Depositary Share (ADS). After allowing for the dilutive effect of dividends and accretion on participating shares, Danka posted a loss in the second quarter of $.35 per basic and diluted ADS compared to a loss of $.04 per basic and diluted ADS in the year-ago quarter.
With regard to the second quarter, Danka Chairman and Chief Executive Officer, Lang Lowrey, commented, "I am pleased that we were able to recover from our disappointing first quarter margin performance and return to more reasonable gross margins, particularly in our U.S. retail equipment and related sales business which generated margins of 35.0% versus 27.9% in the first quarter. I am also encouraged by positive signs in the performance of our retail equipment and related sales business, particularly in Europe, which increased year over year. More importantly, we achieved the substantial completion of the most important and, by far, the most expensive phase of our Oracle 11i ERP system in the U.S. For the first time in our history, we have all of our U.S. customers and employees operating from a single integrated IT system. We will now focus on leveraging this investment to improve our customer service and significantly reduce costs. Of course, we are also excited to be substantially done with the sizeable Vision 21 project and related ancillary expenses, and related capital expenditures we have been experiencing each quarter."